Background

On July 12, Sears Roebuck (“Sears”) prevailed over the City of Palm Beach Gardens (“The City”) and the owner of the Gardens Mall (“Forbes”) in a commercial sublease dispute involving a violation of the store’s substantive due process rights under the Florida and U.S. Constitutions and unconstitutional impairment of contract.

The Sublease

In 1987, Sears Roebuck entered into a thirty-year lease with Forbes. Sears desired to sublease part of its store in the mall to Dicks Sporting Goods in 2011. Forbes later sent a letter to Sears stating that Sears could not sublease to Dick’s Sporting Goods because Sears had no right to sublease, the sports store lacked signage rights, and Dick’s Sporting Goods “did not belong” at the mall.

Resolution 20-2012

Unbeknownst to Sears, Forbes requested the City enact a resolution granting mall owner (Forbes’) approval over subleases and store modifications. Forbes contributed to the drafting process. The City passed Resolution 20-2012 (“Resolution”) which contained no criteria or grounds for approving or denying of any of the listed modifications or proposed subleases and heard no testimony regarding the Resolution.

Holding

Florida’s 4th District Court of Appeals ultimately agreed with Sears, finding that Resolution 20-2012 unconstitutionally impaired Sears’ right to contract with Dick’s Sporting Goods because it gave unilateral approval to the City and Forbes without specific criteria, which allowed Forbes to arbitrarily deny Sears’ sublease. Most importantly, the court stated the Resolution lacked a legitimate interest for a public purpose and no rational basis. To the court, the existing City Planned Unit Development already accomplished the public purpose of the Resolution.

Accordingly, the court held that Sears had a right to sublease to Dick’s Sporting Goods, that the City had deprived Sears of substantive due process, and awarded Sears reasonable fees and costs as the prevailing party.

Future Action

At trial, Sears conceded that the sublease to Dick’s Sporting Goods would require municipal approval through waivers because the plans for signage did not comply with the City’s zoning standards. However, Sears noted regular industry practice involved working with municipalities obtain approvals and waivers for signage. It will be interesting to observe whether or not the City grants the waivers for the signage now that it has lost to Sears at trial, especially since Sears’ lease is up in 2018.

Take-Away

Always be sure to determine if governing ordinances provide sufficient criteria for unilateral decision-making, otherwise there may be a lurking claim that the decision is arbitrary and the ordinance could be unconstitutional.

“An ounce of prevention is worth a pound of cure.” “Penny-wise, pound foolish.” “A stitch in time saves nine.” Few would doubt the universal application of these time-honored pearls of wisdom. Yet when it comes to legal documents, common sense goes by the wayside.

Contract? What Contract?

As a litigation attorney, there have been instances too numerous to count where a potential client calls me about a legal problem. When I ask to review the contract or document at issue, I’m usually met with a response that there is no document or, if there is one, it was not drafted by an attorney. The client then spends thousands of dollars in legal fees correcting a problem that should have been avoided in the first place.

With property values consistently trending upward, many Florida business owners are deciding whether to purchase or lease commercial real property. Below are a few considerations to keep in mind before making your decision.

Cost of Borrowed Funds

While there has been a stream of positive news about the general health of the economy, the Federal Reserve has kept interest rates considerably low. Therefore, it is an attractive interest rate environment for commercial borrowers who are financing real property. Depending on the term of the loan and type of property, current rates range from 3.50% to 6.50%, while prime rate (a barometer for different types of interest rates and the rate which financial institutions lend to their most prominent and creditworthy customers) remains at 3.25%. To put this into perspective, prime rate was 8.25% in 2007. Lower interest rates obviously lower the monthly payment obligation, and can accommodate a move to a higher tier property.

Judged against lease terms, the comparison changes depending on whether the owner is leasing for use as retail or office space. The former is generally based on a percentage of gross sales generated at the site, the latter normally contains an “escalation clause” that annually increases the rent obligation by 2-3%. Additionally, a commercial tenant (particularly a retail tenant) is likely liable for the real property taxes, utilities, and other expenses, which negates some of the perceived advantage that leasing may have over ownership.

As a real estate lawyer, a significant part of my practice involves preparing and negotiating commercial and residential lease agreements. At times, however, potential clients may decide to find a sample lease agreement online, or have their realtor prepare the lease, to avoid attorney fees.

Proceed With Caution

Because most commercial leases are for 5, 10, or even 20 years, the length of time you will be bound by the lease terms warrants hiring legal counsel to look after your best interests. This is equally important in a residential setting, as housing costs are generally the largest monthly or yearly expenditure. From both the landlord’s and tenant’s perspectives, it is important to clearly and thoroughly set forth the terms of the agreement, whether it is a residential or commercial lease, to avoid disputes as to each party’s responsibilities and obligations. The most common issues that create disputes with lease agreements include:

Condition of the property was not thoroughly investigated.

Unclear language concerning the responsible party for maintenance and repairs.

Unclear language as to the type and amount of insurance required to be obtained by each party.

Notice and cure periods, as well as when late fees are triggered, are not clearly stated.

The language is not clear as to how the tenant may exercise an option for the lease term to be extended, known as a renewal option, nor does the lease clearly provide the rent for the renewal option and what happens if the parties cannot agree upon the new rent amount.

The lease was not signed as required by law or an authorized representative did not sign the lease.

Language does not address who owns alterations or improvements made to the property.

Unclear language as to if either party is obligated to repair or rebuild in event of partial or total destruction, or when a party has the right to terminate the lease in the event of destruction.

Failure to clearly state the conditions to be satisfied for the security deposit to be returned to tenant.

If tenant is given an option to purchase, the language fails to clearly provide the terms and conditions of said option and whether tenant’s deposit for the option is non-refundable.

Be extra cautious when negotiating a lease with an option to purchase. An option to purchase requires the parties to not only set forth the terms and conditions to lease the premises, but also requires all terms and conditions of a contract be discussed and clearly set forth in the lease. Often the option to purchase provision is not properly drafted and is a common cause for legal disputes.

Finally, commercial landlords should avoid using a previously prepared lease agreement for a new transaction, even if the agreement was prepared by an attorney. Not only is each transaction unique, but the laws may have changed since the previous agreement was drafted.

The value of thorough due diligence cannot be underestimated by either party before entering into a lease agreement. For instance, is the tenant credit worthy and has a background check on tenant been obtained? Is the landlord responsive when repairs are required? Is the landlord financially sound or is there pending foreclosure or other lawsuits against the landlord?

Keep in mind that once a dispute arises with a lease agreement, the attorney must work within the language in the lease agreement. It is more beneficial, and less costly, to hire an attorney to protect you before a problem arises. In the event a dispute arises, be sure to contact your legal counsel as soon as possible to protect your interests.

Most real estate savvy folks are familiar with the phrase “caveat emptor” or “buyer beware,” as applied to real estate transactions. Buyers are routinely advised to scrutinize their purchases through property inspections, review of zoning, permitting and code compliance of the property in addition to obtaining title insurance. However, when leasing property, tenants typically focus on the terms of the lease agreement often without adequate consideration of risks associated with the landlord’s title to the property. This risk has increased in the past several years given the increased frequency of title transfers of distressed properties through foreclosures, deeds in lieu of foreclosure and other types of distressed property workouts. Tenants are well advised to protect their interests in the event the landlord is not holding clear title to the property. This is particularly important for longer term leases, leases where the tenant is investing in substantial tenant improvements to the property and leases with the option to purchase the property.

What Happens to My Lease in the Event of Mortgage Foreclosure?

Tenants often presume that: (i) the landlord is the lawful owner of the property, (ii) the landlord’s agent executing a lease agreement has lawful authority to do so, (iii) there are no covenants or restrictions affecting their intended use of the property, and/or (iv) there is good legal access to the property. Also, tenants often do not consider what may happen to their lease in the event of foreclosure of a mortgage the landlord may have on the property. Failure to confirm and address such issues may result in significant losses that are not recoverable due to the invalidity of the lease or the condition of the landlord’s title. In the worst case scenario where a tenant is forced to move as a result of legal issues associated with the lease, here are some potential consequences:

the tenant may lose the value of leasehold improvements made to the leased property;

the tenant may lose the value of any design and permitting expenses related to the existing location;

the tenant may incur significant relocation expenses;

the tenant may lose locational goodwill which can be of crucial importance to a tenant’s business; and

the tenant may lose the value of favorable lease terms if current market rates have increased.

Bottom line: Perform Due Diligence

A title search of the leasehold property and subsequent leasehold title insurance provides knowledge of matters affecting the title that are pertinent to the leasehold investment and insures against a wide range of damages that could be suffered due to invalidity of the lease and/or due to the condition of the landlord’s title to the underlying property. Let the tenant beware!

Looking back at 2012, there are two memorable phrases that I frequently heard from clients: “I just need a simple lease” and “you are the best real estate lawyer ever to have lived.” This article will focus on the former statement for various reasons, one of which may or may not involve honesty.

“I just need a simple lease.” Interestingly, the remainder of the exchange tends to go something like this:

Please also make sure we have exclusivity, and oh yeah, we’re going to install some improvements which the landlord will pay for, and we may move into the adjacent space if it becomes available, and, one more thing, the rents should apply to the purchase price if we decide to buy the space.”

Simple enough?

The reality is that every lease transaction contains unique facts and circumstances, and each lease should be documented accordingly. For example, a lease for a single tenant building should be structured differently than for a multi-tenant building. A small business may be less equipped to handle certain lease administrative functions as opposed to a national chain. One size does not fit all in the leasing world, and an ounce of effort up front when drafting the lease can prevent significant uncertainty and dispute down the road.

It has been said that parties should approach a lease relationship similar to a marriage (which may hold some truth considering many landlord-tenant relationships can outlast modern marriages). Taking this analogy to its next logical step, the lease document is the prenuptial agreement – which allows the parties to memorialize their agreement at a point in time when they are both optimistic about the new relationship and willing to negotiate reasonably. Otherwise, it can be difficult to negotiate once the relationship experiences hardships or setbacks.

Unfortunately, I have seen too many instances where clients are governed by sloppy lease documents that do not give the parties the benefits of their initial bargain. Some of these instances involve what I suspect to be dreadful “internet forms.” Fortunately, simplicity can be achieved in most lease transactions, by striking the delicate balance of simplicity and effectiveness. Our role as real estate attorneys is to help achieve that delicate balance, to help our clients prosper throughout the lease term. The next time you are entering into a lease, it might be worthwhile to take a step back and give serious consideration to the possibility that your relationship with your landlord or tenant may change in the future, but the lease will remain the same. Of course, we hope that any change in the relationship is for the better.

Commercial leases often contain the option of additional or “renewal” terms to extend the lease term. Reviewing and understanding this provision in your lease can help maximize your lease rights, whether you are the landlord or the tenant. This post focuses on the importance of a well-drafted renewal option provision, and the need to monitor critical deadlines.

Mechanics of Renewal Options

Understanding the mechanics of renewal options is important. Some parties prefer automatic renewals, while others favor the delivery of notice to exercise renewals. There can be one or more renewal options. Several factors can influence how to best structure the renewal option provision, such as current and anticipated market conditions, landlord concessions, tenant incentives, business planning, and your administrative ability to monitor deadlines, to name a few.

About this Blog

Since 1924, the real estate and land use attorneys at Henderson Franklin have offered our clients guidance in matters of transactional real estate and development, community association law, real estate litigation, eminent domain, land use and environmental law.

ABOUT THE REAL ESTATE PRACTICE

Since 1924, the real estate and land use attorneys at Henderson Franklin have offered our clients guidance in matters of transactional real estate and development, community association law, real estate litigation, eminent domain, land use and environmental law.

About the Land Use Practice

Attorneys in this practice area represent both private and public interests in matters of land use and environmental law, permitting, zoning, litigation and related legal matters.Read More